Business Loans for Restaurants: How to Fund Your Dream Dining Experience

While many chefs and catering entrepreneurs aspire to create their ideal dining experience, opening or expanding a restaurant demands significant capital. From kitting out a commercial kitchen to funding daily operations and renovations, securing the right financing can be a game-changer for restaurateurs.

There are many options to choose from, from flexible business loans and commercial mortgages to equipment finance and revenue-based funding. We explore the different types of business loans for restaurants and the typical costs to consider.

What are restaurant loans?

Restaurant loans are specialised financial products designed to help business owners start, operate or expand their food service ventures. These loans provide the necessary capital to cover costs such as purchasing equipment, renovating spaces, managing cash flow, or even launching a new restaurant. 

By securing external funding, restaurateurs can focus on what they do best: creating memorable dining experiences.

While there may not be many lenders offering specific business loans for restaurants, many finance brokers and lenders have extensive experience in the hospitality space, like Portman Finance,  Oak North Bank, Millbrook Business Finance and 365 Finance, to name a few. 

Your restaurant business growth stage will influence the type of loans and finance solutions you need, from secured business loans and mortgages to asset finance and merchant cash advances. Check out the main types of restaurant finance to consider. [ANCHOR LINK]

Why do restaurants need financing?

The hospitality industry is famously challenging, and maintaining healthy cash flow can be tricky, so restaurants often find themselves needing financial support. Here are the common reasons for seeking restaurant finance:

• Starting a new restaurant: Initial costs include leasing space, fitting out the kitchen, purchasing inventory and ramping up marketing to attract new customers. Therefore, depending on the scope of your needs, you can utilise various short- and long-term financial solutions.
• Renovating an existing space: Keeping up with design trends or increasing seating capacity to boost revenue can be capital-intensive.
• Purchasing key assets and equipment: High-quality kitchen equipment is essential but expensive. Equipment financing agreements can help spread the costs of acquiring vital assets for your restaurant business.
• Managing cash flow: Seasonal fluctuations or unexpected expenses can present cash flow problems. Working capital loans or lines of credit can help smooth out these periods​.
• Payroll and staffing costs: Working within the hospitality space means you’ll experience significant seasonal fluctuations, and working capital finance solutions can help you cover additional staffing costs in peak seasons. 
• Tax bills and obligations: Running a restaurant comes with changeable conditions and unexpected costs. If cash flow is tight when it’s time to pay your bills, your finance facility can help you meet your obligations. In fact, there are UK lenders, like Clifton Private Finance, Braemer Finance and White Oak, that offer dedicated tax loans to help you pay your tax bills and avoid penalties from HMRC. 
• Expansion and remodelling: Bridging loans and development finance can be used to support your expansion, or various forms of asset and equipment finance, depending on the scale of your plans. 

Using a business loan or other alternative finance solutions can help you fund key operational needs and support your restaurant’s growth while managing cash flow effectively. 

Restaurant start-up costs: what you need to know

Starting a restaurant involves a wide range of costs that can vary significantly based on location, concept and scale. Restaurant startup costs can range from £50,000 to £1 million, with some high-end venues costing even more.

Below, we outline the typical costs involved when starting a restaurant business:

1. Commercial space

Whether you choose to lease or buy premises, securing a commercial space to host your guests is one of the most substantial expenses for a new restaurant. Leasing typically requires a deposit of 3-6 months' rent, while purchasing a space may require a down payment of 15-35% of the property value. The total cost depends heavily on location; prime spots can command a significant premium but also offer higher foot traffic​.

2. Renovations and decor

Once you've secured a space, you’ll need to make the venue fit for service and your desired experience. These costs can vary greatly based on the scope of work needed. Basic updates might include painting and flooring, while extensive renovations could involve custom kitchen builds, which can exceed £200,000. Investing wisely in essential elements, like seating, lighting and kitchen setup, can help manage costs while ensuring the space is functional and inviting​.

3. Kitchen appliances and equipment

Fitting your restaurant with the necessary kitchen equipment is another major cost. Essential items like ovens, fridges and dishwashers, as well as furniture for dining areas, can be costly, depending on the size of your premises. Prioritising essential equipment over non-essentials can help you manage upfront costs while ensuring your team has what they need to operate efficiently​.

4. Restaurant technology

Today’s restaurants rely on modern technology to enable efficient operations. A good point of sale (POS) system is a non-negotiable investment that facilitates payment processing, order management and sales tracking. Additional tech needs might include reservation systems, kitchen display screens and employee scheduling software. Ensure you have sufficient funds to invest in tech solutions for effective communications and managing payments.

5. Licences and permits

Operating legally requires various licences and permits, which can include food service licences, alcohol licences, and health inspections. Costs for these can range from £100 for basic food service permits to over £100,000 for alcohol licences, depending on your location and what you're serving. Securing these licences early is crucial to avoid delays in your restaurant’s opening​.

6. Miscellaneous and unexpected costs

Beyond planned expenses, it’s wise to budget for unexpected costs, such as last-minute repairs, additional permits or emergency funds. Having a contingency budget can help absorb these surprises without derailing your overall financial plan​. Also, building cash reserves is recommended to provide a buffer in slower periods during the year.

Types of business loans for restaurants available in the UK

Let’s explore the main types of restaurant loans to consider and how each finance solution can support different business needs and preferences.

Traditional bank loans

Business loans from banks and traditional lenders are a common choice for restaurateurs with strong credit histories and solid business plans. 

Key considerations:

• These loans usually offer fixed interest rates and set repayment schedules, making them predictable and easier to budget for. 
• However, bank loans typically require significant assets for collateral (as secured loans) and thorough financial documentation and checks.
• Banks may also scrutinise the applicant's creditworthiness closely, making these loans harder to secure for new or riskier ventures​.

Small business loans

Alternative finance providers can offer unsecured business loans for restaurants that skip the need for collateral and long application processes, helping you access the capital you need faster.

Key considerations:

• Small business loans are typically short-term loans, which often means slightly higher interest rates, but less time incurring interest.
• Using loans from alternative, digital lenders, like iwoca, means you’ll be able to apply and get funded entirely online.

iwoca’s Flexi-Loans are designed to offer transparent, fair access to funds, without the need for lots of paperwork or assets as security. Borrow between £1,000 and £1,000,000 for everything from start-up costs to refurbishments on your existing space. Choose a term that suits you, from 1 day to 60 months, with no early repayment fees. You can be approved in a few hours, with funds deposited into your account as quickly as the same day.

Find out more and see how much you could borrow with our quick small business loan calculator.

Government-backed loans and grants

For UK restaurateurs, government-backed loans, such as those provided through the British Business Bank, can be a useful option. The government guaranteed up to 70% of the loan’s value to reduce lender risk, though both your business and personal credit history may be taken into account during approval decisions.

It’s also worth exploring your eligibility for certain government grants for business. They can be a great form of support, as they don’t require repayment, but are often focused on specific regions, industries or purposes.

Key considerations:

• Government-backed loans often come with lower interest rates and more flexible repayment terms compared to traditional loans. 
• These finance options can involve lengthy applications, strict eligibility criteria​ and grants are often offered in tranches and funding windows. 

Asset finance

Whether you need new kitchen equipment to kit out new premises or for restaurant refurbs, vehicles for fulfilling orders or key business assets, such as POS systems, using an asset finance agreement can help you spread the costs of hiring or leasing. 

Key considerations:

• Providers offer a variety of options to suit different needs, such as hire purchase, contract hire and lease finance.
• Some agreements offer businesses the option to return assets or buy them at the end of the initial term – usually via balloon payment. 

Merchant cash advances (MCAs)

A merchant cash advance provides quick access to funds by borrowing against future sales. Ideal for restaurants with high card sales, MCAs offer a lump sum upfront, which is then repaid through a percentage of daily card transactions. 

Key considerations:

• MCAs align repayments with your cash flow, making it easier to manage debt during slower periods.
• Costs can be higher than traditional loans, and approvals and terms are largely based on your turnover.

Commercial mortgages

For restaurateurs looking to buy or build a property, a commercial mortgage offers long-term financing solutions. Borrowers can potentially access up to 90% of the property's value, with repayment terms ranging from 1 to 30 years. The property itself serves as collateral, reducing the lender's risk. 

Key considerations:

• This option is suitable for those aiming to own their venue, offering stability and the potential for property appreciation​.
• Commercial mortgages are for very specific needs, so you may want to consider a development loan or bridging finance for restaurant builds.

VAT loans 

As restaurants often face seasonal fluctuations and high operational costs, managing large quarterly VAT bills can be challenging.  A VAT loan can provide short-term financing to help restaurants cover their VAT payments in certain periods.

Key considerations:

• These loans allow businesses to spread the cost of their VAT payments over several months, freeing up cash for other immediate needs.
• While these can help you avoid penalties for late tax payments, you can also consider a Time to Pay arrangement from HMRC.

Working capital loans and lines of credit

If you want a more flexible finance solution for ongoing needs, a working capital loan or line of credit can be an ideal option. These short-term options are designed to cover everyday operational expenses, such as wages, rent and utilities, especially during off-peak seasons. 

Key considerations:

• These solutions can be tailored to your specific requirements, but may come with higher interest rates or fees depending on the lender and loan type​. 
• You’ll usually only pay interest on the funds you draw down, and in a revolving credit facility, you can top your limit once funds are repaid.

Trade credit

This is an agreement with a supplier, sometimes using a third-party intermediary, that facilitates deferred payments for goods and extended payment schedules, from, say, 30 days up to 90 days, or longer. This enables you to purchase and access goods, inventory and various supplies upfront, allowing you to generate revenue before paying for them, to support cash flow management. 

Key considerations:

• Use trade credit responsibly to maintain good supplier relationships.
• Often, this type of credit agreement doesn't incur interest.
• You can use a trade credit tech provider, like iwocaPay, to ease the payment process.

Equity finance

If you don’t want to take on short or long-term debt, you can seek investment from a range of equity finance providers, such as VCs, angel investors, private equity partners or via crowdfunding.

Key considerations:

• Equity finance solutions offer capital for restaurant businesses that don't need to be repaid.
• The trade-off is that, in exchange for funding, investors get a proportion of business control, a share of future profits and/or rewards and incentives.

How to choose the right restaurant loan for your business 

When selecting a suitable business loan for your restaurant (or business finance facility), you need to weigh up the pros, cons and cost of borrowing for different finance solutions and lenders, plus your own specific funding requirements. 

Consider the following factors before choosing the best restaurant financing option for your needs:

1. Funding purpose: Clearly define why you need the loan, what you want to use it for, and for how long, such as for startup costs, expansion, equipment purchases or ongoing cash flow management and working capital needs.
2. Eligibility: Check the requirements for each type of loan, such as trading history and turnover thresholds, collateral needs (if it’s a secured loan), business plan/purposes and credit score.
3. Repayment terms and flexibility: Consider the loan length and repayment terms, and how they fit with your projected cash flow. Shorter terms may save on interest over time and offer more flexibility, but often require higher monthly payments.
4. Interest rates and fees: Compare total borrowing costs, including interest rates, arrangement and security fees, and any early repayment penalties.
5. Speed of access: Consider the urgency of your funding needs and whether a short-term loan might be the most suitable option – some digital lenders offering short-term, unsecured loans, like iwoca, won't charge you for repaying loans early.
6. Risk tolerance: Assess your comfort level with the risks involved, such as pledging collateral for secured loans or sharing ownership with equity investors​.

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Enjoy a healthy future on a plate, with the right restaurant finance

When starting or running your own restaurant, you’ll need to overcome numerous challenges, but with the right financing, you can address key issues, ease flow concerns and invest in your future growth, putting your best plate forward. 

If you’re looking for fast and flexible business finance, an iwoca Flexi-Loan could be your recipe for success. We’ve helped over 150,000 UK businesses fund operational needs, manage cash flow and reach their growth ambitions.

Our Flexi-Loan benefits include: 

• Rapid access to funds: Apply online in a matter of minutes and get a decision within 24 hours, with funds often available on the same day.
• Flexible repayment terms: Enjoy repayments tailored to your needs and only pay interest on what you use, with no charges for early repayment.
• Short and longer-term options: You can borrow £1,000–£1 million for a few days right up to 60 months, depending on your requirements. 
• No collateral required: Our loans are unsecured, so you don’t need to use business assets as collateral, but you may need to provide a personal guarantee.

Discover how iwoca business loans can help you achieve your restaurant dreams and use our handy loan calculator to see what your likely repayments will be.